INTERNATIONAL BUSINESS TEST 1

DEMOCRACY

Democracy is a form of government in which authority is derived from citizens who exercise power either directly or through elected officials. Well-functioning democracies are defined by free and fair elections, adherence to the rule of law, protection of individual rights, and active citizen participation in the political processes. In a well-functioning democratic system, the government is accountable to its citizens, with leaders subject to replacement through regular and transparent elections. Core principles include political equality, pluralism, and the safeguarding of freedoms such as freedom of speech and assembly, ensuring that all individuals have a say in how they are governed.

Direct democracy places decision-making power directly in the hands of citizens, allowing them to vote on specific policies and laws through referendums rather than relying on elected representatives.

Representative democracy allows citizens to choose political representatives to make decisions on their behalf, aiming to serve their best interests.

Parliamentary democracy is typically led by the party that wins the most seats in an election, with the prime minister as the head of the majority party.

Presidential democracy is led by an elected president. The president is both the head of state and government, elected by the people in a process that is separate from elections of the legislature.

AUTHORITARIANISM

In authoritarian political systems, a small number of individuals or a small group monopolizes political power and controls the majority of public and private life. The system discourages expression and behaviors that oppose the ideology or vision of those in power. This may be policed by blocking opposing values and ideals through surveillance, propaganda, censorship, and other measures.

An extreme form of authoritarianism is totalitarianism. Under totalitarian regimes, governments strictly disallow ideological deviation. Obedience to the authorities is reflected in daily life. Perceived resistance to the government will be punished. North Korea and Turkmenistan, for example, belong to this category. Totalitarian political systems are usually autocracies, where absolute power is held by the ruler, known as an autocrat.

SOCIALISM

Socialism is both an economic and a political system. Socialism emphasizes public or collective ownership of the means of production, such as land, factories, and other resources. Its main goal is to reduce economic inequality, rather than necessarily maximize private entities’ profits, by ensuring that wealth and resources are distributed as fairly as possible across society. In socialist systems, the state (the government) typically controls key industries and services such as education, healthcare, and transportation, with a view to ensuring universal access to these services. Socialist systems are often reliant on high taxation.

COMMUNISM

Like socialism, communism is both a political and economic system. In terms of economic ideology, communism advocates for public or collective ownership of key industries and resources. The ultimate goal of communism is to eliminate private ownership of production and provide a classless society where resources and wealth are distributed based on need. In this sense, for aspiring communists, socialism is viewed as a transitional phase between capitalism and communism. Under communist regimes, businesses are often nationalized, and the state attempts to control industrial organization and pricing. This means that the state greatly influences market access and competition.

China, North Korea, and Vietnam have communist political systems.

GLOBAL POLITICAL ECONOMY

Global Political Economy (GPE) is not a political or economic system per se. However, it is a helpful academic approach to understanding the interactions between economic and political systems around the world. The study of GPE examines the antecedents, mechanisms, and outcomes of global governance by examining topics such as globalization, international trade, the monetary and financial system, and international development.

There are differing schools of thought about how the GPE functions. “Liberal” political economists argue that economic rationality dominates political decisions around the world, while “economic nationalists” argue that economic decisions are subordinate to political ones around the world.2 These views are more conventionally reflected in the “liberalism” and “realism” theories of international relations.3 Liberalism suggests that international politics is a product of many different actors seeking to achieve their own self-interests.4 Within this school of thought, conflict is usually the result of diverging interests. Economic interdependence and shared democratic values are said to reduce conflicts among countries. In contrast, realism offers a more state-centric perspective, suggesting that the only relevant actors in the global system are sovereign nation-states (i.e., an independent polity not under the authority of any other country).5 Some realists argue that globalization is most stable when supported by a dominant leading state: a hegemon.

COMMON LAW

In common law systems, the law is based both on statutes and on prior court decisions that interpret those statutes and fill in gaps where no statute exists. One of the key characteristics of common law is the stare decisis principle, meaning “let the decision stand,” whereby the precedents of earlier cases serve as binding sources of law. The common law system has Anglo-American roots, which are found to varying degrees in Canada, the US, India, Hong Kong, the UK, New Zealand, and Australia.

CIVIL LAW

The civil law system relies on systematic codes of laws. In contrast to the stare decisis principle, the civil law system is not constrained by the judges’ previous precedents. In a civil law system, the judge’s role is to establish the facts of the case and to apply the provisions of the applicable code. As such, judges’ decisions are generally less influential in shaping civil law than the decisions of legislators who write and interpret the codes. Approximately 150 countries, including Germany, France, Mexico, and Japan, have civil law systems.6

THEOCRATIC LAW

Theocratic legal systems are based on the religious beliefs of the implementing country. Religious leaders in these countries have the legal authority to interpret religious doctrines and regulate business deals and social relations.7 Theocratic law does not cleanly separate religion from the authority of the state. Instead, the government, law, and religion are considered as one unit. Islamic law, also known as Sharia law, is the most widely practiced theocratic legal system, mostly found in the Middle East and North Africa.

GEOPOLITICS

Geopolitics refers to politics involving multiple countries. Geopolitical tensions—taking the form of political disputes over military, economic, social, or technological power among nations—have become one of the most significant risks faced by MNCs today.9 One of the most significant non-violent geopolitical tensions currently affecting MNCs is fraught US–China relations (see Case 4.2). “Brexit” also reflects the culmination of geopolitical tensions between the UK and the EU (see the mini case in Box 4.1). These cases reflect significant disintegration of economic and political relationships among certain countries—what some have called “decoupling.” Meanwhile, some currently non-violent geopolitical tensions may turn violent if not carefully managed. For example, military moves by the People’s Republic of China concerning Taiwan could trigger a response from the US government.10 Other geopolitical tensions have already turned violent, such as the Russia–Ukraine war

POPULISM AND NEO-POPULISM

Populism is a political movement that seeks to represent the interests and concerns of “the common people” against a perceived elite or establishment. During the last few decades, populist movements were largely concentrated in developing countries, for example, in Latin America. However, populism in developed countries, as measured by the vote share for anti-establishment parties there, has reached its highest levels since the 1930s.13 For more details on the economic distinction between developed and developing countries, see Chapter 5. This has given rise in developed countries to what is sometimes called “neo-populism”: the rise of anti-establishment, authoritarianism, nativism, and anti-cosmopolitan values.

Neo-populist sentiment often takes the form of public opposition to liberal international trade and investment regimes, resistance to mass immigration and cultural liberalization, and continuous protests against actions perceived to surrender national sovereignty to international bodies. These issues are common targets for neo-populists because they are perceived to create unfairness and because foreigners are attractive scapegoats.14 Prominent examples of neo-populism in recent years include the UK’s break from the EU through Brexit (see Box 4.1), the Trump administration’s trade wars against China and other nations, and populist party control of parliamentary seats in many European countries in the late 2010s/early 2020s. Neo-populism movements inhibit further economic and political integration among countries.

Neo-populism has been caused by significant economic changes in global production and consumption over the past few decades. The globalization of value chains and the rise of automation—while generally good for companies’ efficiency and productivity—have contributed to increasing income inequality in favor of the higher classes of society. It has also resulted in unemployment in industries characterized by repetitive tasks and/or low-skilled labor. This situation has created an identity crisis among many citizens. Further, information silos enabled by social media have catalyzed and reinforced this upheaval.15

PROTECTIONISM

Protectionism is a state economic strategy designed to shield a country’s domestic industries, whether infants or more established, from foreign competition. Protectionist policies include measures such as tariffs, import quotas, and other trade restrictions. These policies aim to protect local jobs, support domestic businesses, and reduce trade imbalances. Leaders launch these policies to appeal to voters who feel threatened by globalization and foreign competition, arguing that such measures can safeguard, for example, local jobs. For example, in recent years the US government has instituted significant import tariffs on furniture and new energy vehicles from China.

FOREIGN INVESTMENT

Foreign investment laws restrict MNCs’ entry strategies and otherwise restrict how they organize and operate in host markets. Many countries impose restrictions on foreign investment, although the details of these legal instruments and industries in which they apply can widely differ. Some countries restrict the amount of equity that foreign investors can buy, establish “negative lists” to identify sectors that are closed off entirely or partially to foreign investment, set up screening and approval mechanisms for foreign investment such as committees to approve mergers and acquisitions between foreign and domestic companies, restrict the types and number of foreign personnel that can be hired, among other requirements.31 For instance, although recently changing, for decades the Chinese government instituted requirements that foreign companies seeking to participate in several industries, such as telecommunications and automotives, must enter joint ventures with local Chinese companies and cannot hold majority ownership of those entities.

INTELLECTUAL PROPERTY

Intellectual property rights (IPRs) offer one of the most valuable means for MNCs to profit from their investments.32 By threatening legal sanctions if these monopolies granted by the government are infringed, IPRs can deter unauthorized copying, use, or sale of an MNC’s “creations of the mind.” In fact, IPR assets account for between 30% and 95% of the asset value of many MNCs today.33 Typical examples of MNCs’ IPR include patented technological inventions (e.g., elements of Moderna’s m-RNA COVID-19 vaccine), trademarked brand names and symbols used in commerce (e.g., Coca-Cola’s logo), copyrighted creative work (e.g., Marvel’s latest Spiderman movie), registered designs (e.g., the appearance of Apple’s iPhone), geographical indications (e.g., Moët & Chandon’s beverage from Champagne, France), and plant variety rights (e.g., Monsanto’s genetically modified cotton). Different countries can have notably different laws and enforcement mechanisms for IPRs, offering MNCs more or less legal protections at greater or lesser costs.

ANTITRUST/COMPETITION

Antitrust law, also called “anti-monopoly law” or “competition law” in some jurisdictions, promotes fair competition and prevents monopolistic practices. It regulates mergers and acquisitions to prevent market concentration that could harm competition and consumer choice, and limits price-fixing among other practices. In recent years, the EU has maintained especially aggressive antitrust enforcement. Companies such as Microsoft, Google, and Apple have been subject to major fines in the EU for antitrust violations. For example, in 2024, Microsoft came under fresh investigation in the EU for allegedly illegally tying its Teams app with its Office 365 and Microsoft 365 subscriptions to lock in users.

NON-MARKET STRATEGIES AND STAKEHOLDER ENGAGEMENT

More Specific Political and Legal Risk Management Strategies

Beyond staying informed about risks and applying the general global risk management framework, there are, of course, many more specific strategies that MNCs can adopt to manage political and legal risks.

MNCs must intensify their “non-market” strategies to mitigate political and legal risks. Non-market strategies typically manage relations with stakeholders beyond direct competitors, such as governments, the media, and the public. Effective non-market strategies require careful consideration of the “salience” of stakeholders: their perceived (i) power (in terms of the resources they have), (ii) legitimacy (in terms of whether their behaviors and interests are in line with what is considered socially acceptable), and the (iii) urgency of their interests (in terms of how important their interests are to them and how quickly they expect them to be addressed).48 A common category of non-market strategies is corporate political strategy/activity (CPA), such as lobbying. Another common category is corporate social responsibility (CSR) initiatives, which focus on projecting an image that the MNC meets moral, legal, commercial, and public expectations of stakeholders.

Effective non-market strategies may involve becoming more influential in the policy formation process in key countries. This can be achieved by coordinating policy proposals with other companies through industry associations. For example, in summer 2018, several MNCs collaborated under the National Association of Manufacturers to discreetly lower US tariffs on Chinese components used in their US operations.

MNCs can also address political risks by aligning spending with mainstream political agendas, such as job creation. Ford, for instance, adjusted its investment plans in 2017 in response to rising US neo-populism by initially cancelling a $1.6 billion Mexican factory in favor of creating 700 jobs in Michigan, and later investing more in Michigan for self-driving cars. Such decisions should be accompanied by strategic marketing to shape public and political discourse in one’s own interest.

Another non-market strategy involves aligning company messaging with government officials’ views. Whirlpool, facing competition from South Korean companies LG and Samsung, leveraged anti-foreign production rhetoric in 2017 to gain favor with US politicians and support trade barriers. Despite the South Korean companies’ investments in US plants, tariffs were imposed on them.

At the same time, foreign MNCs are not necessarily doomed to fail under neo-populism, protectionism, and geopolitical tensions. For example, some Asian auto MNCs are using their US factory workers to lobby lawmakers, highlighting their contributions to the US economy. This approach helps bridge the “liability of origin” (i.e., legitimacy challenges and other costs companies face in a host market because they are from a certain home market) and “liability of foreignness” (i.e., the costs and other difficulties that foreign MNCs face because they are from a home country that is distant in some way -- culturally, geographically, politically, economically, in terms of regulations, and so on -- from a host country) and shows the companies’ value to the host country.

MNCs can also benefit from lobbying their home governments to negotiate with foreign host nations. For instance, ZTE, a Chinese telecom firm, achieved a high-profile agreement between the US and Chinese governments in 2018 to ease sanctions on the firm. Companies employing a large number of domestic workers in strategic industries may be most likely to gain their home government’s support.

Moreover, increasing non-state stakeholder engagement and public relations, more generally, is crucial. This includes media campaigns to showcase how the firm’s values align with national interests. MNCs should consider engaging with both neo-populist publics and governments, even when negatively affected by neo-populist policies. For example, GM, Caterpillar, and Harley-Davidson all suffered from US tariffs during the Trump administration, and Harley’s poorly handled response to the tariffs led to a loss of consumer loyalty.

Lastly, ethical business practices exhibited through CSR activities can help MNCs reduce political and legal risks. MNCs are expected not only to contribute economically but also to uphold ethical standards. For example, Unilever’s global commitment to sustainability and ethical sourcing helps it maintain positive public relations and reduce the likelihood of governmental intervention in its operations. Other common CSR strategies include, for example, donating to charities.

DIFFERENCES IN CONTRACT LAW

i don’t even think she went over this…

MARKET ECONOMY AND CAPITALISM

A market economy is an economic system where the production, distribution, and pricing of goods and services are driven by the supply and demand of private (non-state/non-government) actors, such as household consumers and businesses. In this “free market” system, private producers/sellers make decisions based on private purchasers’ demand, as well as competition—with the goal of earning profits. The ability of companies to freely act in this system can ensure an efficient allocation of resources in the economy.

Capitalism is an economic system in which private actors own and control the means of production (e.g., factories, land, and capital) rather than the government. The core principles of capitalism—such as minimal government interference, private property rights, and the pursuit of profit—also underpin the market economy.

CENTRALLY PLANNED ECONOMY (COMMAND ECONOMY)

A centrally planned economy, also referred to as a command economy, is an economic system in which the government allocates resources directly. In other words, the government determines how much is produced for whom and by whom. The underlying justification for this system is the belief that the government is better suited than the market, usually to ensure fairness, to determine how resources should be allocated. Countries considered to have socialist or communist systems often have aspects of planned economies. Government intervention occurs through influence over companies’ economic decision-making and ownership of the means of production. State-owned enterprises (SOEs)—companies that are established and/or owned by the government—are a common mechanism for such control. The Soviet Union was a clear example of a centrally planned economy.

MIXED ECONOMY

In reality, it is rare to see either a pure market economy or a completely centrally planned economy. A mixed economic system is more common. The mixed economy is a hybrid economic system combining elements of the free market and government planning. For example, European countries such as France, Italy, and Sweden have many aspects of market economies but also have many SOEs.

THE NATURE OF ECONOMIC TRANSFORMATION

idk.

DEREGULATION

idk.

PRIVITIZATION

idk. good luck.

PRODUCT SAFETY AND PRODUCT LIABILITY

idk.

BROADER CONCEPTIONS OF DEVELOPMENT

idk.

DEFINITION OF CULTURE

There are over 160 definitions for the term culture.1 The number and variety of those definitions show how complicated culture is. In this textbook, culture is defined as the shared beliefs, norms, and values that cause individuals to conform to a society or group and provide mechanisms for the survival of the society or group.2 Cultural norms tell us what we should do and what we cannot do by prescribing and proscribing behaviors. For example, norms prescribe what clothes we can and cannot wear to a funeral.3 Cultural beliefs show our understanding of the truth. Cultural values tell us what is right and desirable. These beliefs, norms, and values are shared by members of a society and are transferred to the next generation through the process of socialization. The socialization process indicates how parents, friends, educators, and other members of a particular society influence an individual and how interactions within these societal groups cultivate an individual’s value system.

VALUES AND BASIC ASSUMPTIONS

Cultural values reflect underlying societal emphases on how things should be. They indicate desirable end-states or behaviors, thus guiding peoples’ selection and evaluation of business activities. For example, if a culture stresses ambition and success, then it tends to support those legal, market, and educational systems that are conducive to competition.12 Values often concern the core issues in our lives such as personal and social relationships, morality, gender and social roles, race, social classes, and societal organizations. Assumptions are unquestioned standards about the way things are. People brought up in the same community tend to share certain assumptions about morals and ethics (e.g., what is right or wrong, what is desirable or undesirable). They likely also share assumptions about human nature and social relationships. The next section presents several models that highlight key national differences in cultural values and assumptions.

HOFSTEDE MODEL

Geert Hofstede’s cultural dimensions theory is probably the most influential model that quantifies cultural differences across countries.13 By surveying the employees of IBM, a major multinational company, in its overseas branches and subsidiaries located in over 70 countries, Hofstede originally found four cultural value dimensions: individualism vs. collectivism, masculinity vs. femininity (also known more recently as motivation toward achievement and success),14 power distance, and uncertainty avoidance. While his original usage of a single company to conduct his study and the static nature of his cultural model have resulted in some criticism, Hofstede further validated the dimensions in his studies on commercial airline pilots, students, civil service managers, and other professionals in different countries. The large volume of articles using Hofstede’s measures has also allowed for a meta-analysis of his dimensions over time.15 Following his original study, based on more recent research on world culture, two additional cultural dimensions—long-term orientation vs. short-term orientation and indulgence vs. restraint—were added to the Hofstede model.

INDIVIDUALISM-COLLECTIVISM

This dimension refers to the degree to which a person sees himself or herself as an individual or a member of a group. In individualistic cultures, people tend to value personal achievement and privacy and tend to prioritize individual autonomy over group obligations. In collectivist cultures, people recognize that they are part of an organization, family, or group, so there is an emphasis on loyalty and devotion to the organization, one’s own family, or the group. Therefore, in individualistic cultures, active expression is associated with personal creativity; whereas, in collectivist cultures, active expression is the process of exchanging feelings with others. If a country features an individualistic orientation, it has a high score on the individualism dimension. A country gets a lower score if it leans toward collectivism. On this index, a clear gap has been found between developed Western countries and most other countries (see Table 6.2). North America and Europe usually have strong individualistic values. For instance, Canada and Hungary scored 80 points. In contrast, most Asian, African, and Latin American countries are considered collectivist societies with relatively low scores on this dimension. For example, Colombia scored 13 points and Indonesia 14 points. The greatest contrast is found when comparing the US and Guatemala, which are at opposite ends of the spectrum. Guatemala scored six points while the US scored 91 points on this dimension.

MASCULINITY-FEMININITY

People in masculine cultures stress acquiring power, success, and fortune. They tend to be more aggressive, competitive, and goal-driven. People in feminine cultures place a higher value on the quality of life and relationships with others. They are generally more caring and considerate. Therefore, a workplace in masculine societies often features a competitive atmosphere in which tension and conflict prevail. In contrast, in feminine cultures, there is an emphasis on equality between men and women, and the workplace atmosphere encourages harmonious interactions between co-workers. Additionally, an individual’s career is considered relatively less important as greater emphasis is placed on maintaining stable employment and creating a tension-free work environment. A country gets a high score on the masculinity dimension when it embraces a masculine culture, or a low score when it favors a feminine culture. The masculinity scores of Nordic countries are relatively low, with Norway and Sweden scoring eight and five respectively. In contrast, Japan and certain European countries like Hungary, Austria, and Switzerland show very high scores. The US and the UK have moderately high scores on this dimension

POWER DISTANCE

Power distance refers to the degree to which people in a society accommodate unequal distributions of power. People in high power-distance cultures tend to conform to the power structure as they are more likely to accept the imbalance of power. On the other hand, in low power-distance cultures, people are less likely to accept the concentration of power. Hence, managers in such workplaces should use their power carefully and strive to build trust relationships with employees. The power distance dimension has important implications for management control in an organization. Scores on the power distance dimension are relatively high in many Latin American, Asian, African, and Arabic countries where social hierarchy is more visible. For instance, due to large power distance, young people in Ghana are unwilling to speak up in front of their elders.16 On the other hand, Anglo and Germanic countries usually have small power distance scores, with Austria scoring 11 and Denmark 18.

UNCERTAINTY AVOIDANCE

Uncertainty avoidance refers to the degree to which people want to stay away from uncertain or ambiguous situations. People in cultures that have low uncertainty avoidance tend to care less about traditional institutions and prescribed rules. They are more likely to believe that risks are inevitable and success can be achieved by taking chances. In contrast, people in high uncertainty-avoidance cultures prefer to have stable and predictable work environments so that they take fewer and lower risks. Pre-defined routines, manuals, and procedures are considered ways to reduce uncertainty. Latin American countries, Southern and Eastern European countries, and Japan show relatively high scores in the uncertainty avoidance dimension. In contrast, the scores for Anglo, Nordic, and Chinese cultures are relatively low. Interestingly, while Belgium has a high uncertain avoidance score of 94, Sweden and Denmark score much lower at 29 and 23, despite their geographic proximity.

HALL MODEL (HIGH CONTEXT VS. LOW CONTEXT)

The Hall model, developed by American anthropologist Edward T. Hall, focuses on how cultural context influences communication between community members.18 In the Hall model, the term context indicates to what extent the context of a message is as important as the message itself. In other words, it concerns what inferences are drawn from similar experiences and expectations of a society or group.

High context refers to a situation where members of a society or group have close connections over a long period of time and have developed implicit understandings about what to do and what to think. For example, one’s family is usually a high-context environment. In a high-context culture, many things are not explicitly expressed; signals or meanings can only be fully understood within that specific culture. A few words can carry a complicated message embedded in the culture. Even without using words and tones, body gestures can be interpreted correctly by members of the same culture. For people outside of the culture, such communication becomes vague and ineffective. Typically, Asian, African, Arabic, and Latin American countries are regarded as high-context cultures.19 On the other hand, in low-context societies, people tend to have shorter connections with one another. Lacking implicit mutual understandings, communication needs to be more direct and specific. In a low-context culture, values and beliefs need to be expressed explicitly so that people know how to behave appropriately in this culture. Switzerland, Germany, Scandinavian, and Anglosphere countries are often viewed as low-context cultures.

CULTURE CHANGES

Economic development has facilitated urbanization and improved the quality of life and educational attainment while weakening traditional values. The trend of globalization has also significantly enhanced cultural exchange between countries and led to cultural changes. Increased global exchanges of goods, services, and knowledge, the development of transport and communication technology, and the expansion of MNCs have all contributed to the changing world culture. Especially, MNCs have become major cultural incubators.

VALUES AND NORMS

idk.

SOCIAL STRUCTURE

idk man. i pay attention in class, hopefully that’s enough.

WHAT IS SUSTAINABILITY

As the impact of corporate business practices on society and the environment has become increasingly profound, people are more and more concerned with issues such as sustainable development, corporate sustainability (CS), corporate social responsibility (CSR), and business ethics. These terms, especially “sustainability,” have become buzzwords for companies. What is sustainable development? How is corporate sustainability related to corporate social responsibility? More importantly, how should MNCs address these issues when they conduct business in global markets? Changing expectations of MNCs involved in cross-border trade and investment have made these issues more significant for MNCs and brought complex and complicated implications to their stakeholders.

SUSTAINABLE DEVELOPMENT

Sustainable development focuses on achieving a balance between current economic growth and environmental preservation for future generations. It includes three interdependent but mutually reinforcing pillars, as depicted in Figure 7.1, of economic growth (profit), social development (people), and environmental protection (planet), the so-called three Ps of sustainability.8 The notion of sustainable development reminds us of environmental limitations that inhibit present and future needs. Leaders from developing countries claim that developed countries are at fault because their lavish food and energy consumption patterns produce massive amounts of waste and pollution.

CORPORATE SUSTAINABILITY

People, Planet, Profit

Corporate sustainability is the concept of a business being accountable for how it manages the impact of its processes on stakeholders and taking responsibility for producing a positive impact on society.15 Consistent with the concept of sustainable development, the notion of corporate sustainability encompasses three dimensions: social, environmental, and economic. The three dimensions reflect the three Ps of the so-called “triple bottom line,” illustrated before as the pillars in Figure 7.1: people, planet, and profit. Any entities participating in economic activities should do their best to find the right balance among these dimensions in making key decisions. They should operate in ways that secure long-term economic performance and avoid short-term behavior that is socially detrimental or environmentally wasteful.16 They should be encouraged to identify new and innovative ways to create value and mitigate risk in the social, environmental, and economic dimensions of sustainability. Specifically, corporate sustainability can be explained based on the principles related to the three Ps. We will now examine them in more detail: social integrity, environmental responsibility, and economic prosperity.17

PEOPLE: SOCIAL INTEGRITY

Social integrity focuses on fulfilling the social responsibility of companies to various stakeholders with whom their business has a direct or indirect relationship. For example, companies are responsible for maintaining safe working conditions and providing wages above sustenance levels for their employees. To consumers, companies have an obligation to deliver safe and reliable products. Companies are also expected to ethically source raw materials or ingredients from their suppliers.

For MNCs, most commonly cited issues related to people include child workers, sweatshops, low wages, poor working conditions, etc.

PLANET: ENVIRONMENTAL RESPONSIBILITY

Environmental responsibility requires firms to not only comply with the laws and regulations that govern the treatment of the environment but also actively adopt business practices that are conducive to environmental protection. Traditionally, environmental protection was considered to be “in the public interest” and thus governments have assumed principal responsibility for assuring environmental management.21 Nowadays, companies are expected to make greater contributions to environmental protection, and not simply follow government regulations and directions. Their responsibilities include not only reducing the adverse effects of product use on the environment but also utilizing resources more efficiently through reusing and recycling. Companies are expected to be environmentally responsible throughout their business activities, from sourcing to production, distribution, and disposal.

PROFIT: ECONOMIC PROSPERITY

Economic prosperity emphasizes that a company should use its resources in the most efficient and responsible manner so that the business maintains its profitability and stability in the long run. The fundamental basis of long-term, above-average financial performance is sustainable competitive advantage.27 This dimension of corporate sustainability aims at creating a competitive advantage for the company by discovering new ways of lowering costs and/or increasing value for their customers and society. The key is to identify product offerings and business operations that are economically profitable as well as socially and environmentally responsible.28

CORPORATE SOCIAL RESPONSIBILITY

Corporate social responsibility typically encompasses the economic, legal, ethical, and discretionary expectations that society has of organizations at a given point in time.31 The goal of CSR is to accept responsibility for the company’s actions and encourage a positive impact through its activities on the environment, consumers, employees, shareholders, communities, and other stakeholders. In other words, sustainability objectives can be embodied in specific social responsibilities that companies need to fulfill. The key is to consider not only current but also future stakeholders.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE (ESG)

Partially in response to pressures toward sustainability and corporate social responsibility noted above, along with efforts to better understand the relationship between environmental, social, and financial performance, a movement to evaluate firms based on their performance with respect to environmental, social, and governance (ESG) issues emerged. This expectation of firms has arisen as certain institutional and other investors have increasingly monitored firms on issues pertaining to the UN Global Compact, the Triple Bottom Line, and the UN Sustainability Goals (SDGs) as noted earlier in this chapter. The “E” in ESG refers to a firm’s environmental performance, and the “S” refers to its social performance. The “G” refers to corporate governance, specifically the structures and processes that are used to ensure that firms are accountable to their stakeholders, resilient to changes in their environment, and transparent to their investors. Firms that are well-governed will be better able to manage a broad range of stakeholder expectations. Global sustainable funds that are driven by ESG performance are present around the world, although these are most prominent in Europe. It is noted that a number of US firms are currently removing ESG designations from their names.

ETHICAL CHALLENGES TO CS AND CSR ISSUES

Corporate Social Responsibility asks what corporations are in charge of providing to society and if their only loyalty should be to their shareholders.

ETHICAL DILEMMAS

Ethical Problems for MNEs
- When work conditions in a host nation are inferior to those in an MNE’s home nation, whose standards to follow?
- What is the responsibility of a foreign MNE when operating in a country without basic human rights?
- Should an MNE feel free to pollute in a developing nation if doing so does not violate laws?
- Tragedy of the commons
- Is it ethical to make payments to government officials to secure business?
- Do multinationals have a responsibility to give back to the societies that enable them to grow and prosper?

STRAW MEN

The straw man fallacy is when someone makes an argument that isn’t really what the discussion is about—it seems like it is on the surface, but if you look closer, you see that they aren’t actually addressing the problem at hand.

Friedman Doctrine - don’t need to do anything but provide value to shareholders

Cultural Relativism - child labor is okay if the country you’re doing it in says it’s fine

Righteous Moralist - use the ethics of the home country of the corporation

Naive Immoralist - if other firms are doing it, it is fine to do it too

UTILITARIAN ETHICS

Hold that the moral worth of actions or practices is determined by their
consequences. Actions are desirable if they lead to the best possible
balance of good consequences over bad consequences.

KANTIAN ETHICS

Based on the philosophy of Immanuel Kant who argued that people should be treated as ends and never purely as means to the ends of others. People have dignity and need to be respected, they are not machines

ABSOLUTE ADVANTAGE

Adam Smith, 1776

The idea that countries should produce goods they are better at producing than other countries. Trade is a positive-sum game.

COMPARATIVE ADVANTAGE

Ricardo, 1817

Specialize in goods that your country produces the most efficiently and buy goods it produces less efficiently from other countries. Comparison is made between both of the goods they could produce and measured with opportunity cost, not between whether one country is better at producing the good over another country.

FACTOR ENDOWMENT THEORY

While both absolute and comparative advantage theories focus on the efficiency and productivity of workers in a specific country, the factor endowment theory attributes the cause of trade to the existence of different factors across countries. Countries are endowed with different resources; while countries such as China and India are endowed with an abundant supply of labor, other countries such as Russia and Canada are endowed with massive land. Simply put, this theory argues that a country should produce a product in which it intensively uses the factors that it has in abundance. According to this theory, it makes sense that while China takes advantage of its huge supply of labor to produce labor-intensive products, Canada produces agricultural products, making the best use of its extensive arable land. In a nutshell, they contend that differences in national factor endowments are the main source of comparative advantage.

INTERNATIONAL PRODUCT LIFE CYCLE

Raymond Vernon introduced this theory in the mid-1960s.9 According to Vernon, a product goes through a life cycle just like a human being. A product is born, grows and matures, and dies.

At the introductory stage, a product is invented and introduced in a developed country like the US.

Then at the growth stage, the product is introduced to other developed countries that can produce their own products.

Afterward, as the product gets mature and standardized, even developing countries can produce the very same product that the developed country invented first. It is at this stage that the inventing country becomes a net importer of the very same product its company invented.

Finally, a new product will replace the existing product as it gets old.

This theory was once useful in explaining the trade pattern between developed and developing countries. However, the validity of the IPLC theory has increasingly become weaker as not only the product life cycle gets shorter but also more companies market and sell their products targeting consumers in the global market, not confined to their respective domestic markets. In other words, we seldom observe the sequential introduction of products from developed to developing countries in this integrated global economy.

NEOCLASSICAL TRADE THEORIES

Absolute Advantage, Comparative Advantage, Factor Endowment Theory, International Product Life Theory

NEW TRADE THEORY

Presumes increasing returns to specialization. This means that the units of resources required to produce a certain good are assumed to decrease over a period due to the first-mover advantage and economies of scale. The first-mover advantage refers to the benefits that an early entrant into a new industry can enjoy over latecomers, particularly when the industry can accommodate only a few competitors.

PORTER’S DIAMOND MODEL

Model in which he explains why a certain country continues to sustain a competitive advantage in a particular industry. Factor conditions: classifying the factors into two different categories: basic factors and advanced factors. While basic factors consist of natural factor endowment such as labor, land, and climate, advanced factors are created by the provision of quality education and effective training.

MERCANTILISM

Government intervention to keep trade surplus. Trade is a zero-sum game, just like politics. Eventually, the country in a trade deficit will run out of money. Export specialized goods, and make sure your imports are only the raw materials you use in order to specialize or add value to the goods you are going to export.